Could AFA compliance costs fall?
Authorised financial advisers could be set to save money on compliance under the new version of the Financial Advisers Act.
Wednesday, July 13th 2016, 1:59PM 
4 Comments
The Act has been under review for the past 18 months and the Ministry of Business, Innovation and Employment's recommendations for its new look have been revealed today.
They are expected to form the basis for a bill later in the year.
The most significant change for advisers is that all existing designations will be removed. Instead, there will be financial advisers, advice firms and their agents.
Everyone offering financial advice will have to abide by a code of conduct that will cover competency and conduct requirements. All will have to put their clients' interests first and disclosure expectations will be uniform and simplified.
That will mean significant change for people who are currently operating as RFAs or in a QFE.
But for people who are currently AFAs, there will not be a lot of change - although their firms will now have to be licensed by the FMA.
However, things could be set to get a bit easier in some regards.
The system of adviser business statements (ABS) - which are required to be maintained but do not have to be regularly submitted - is up for review and likely to change.
MBIE said it was likely that costs on AFAs would be reduced.
"There also appears to be missed opportunities for efficiencies. AFAs working for a QFE are effectively regulated twice – by the FMA via individual licensing and by the QFE through their ABS and licensing process. Further, there is limited ability for advisers working in the same firm to consolidate their compliance activities. For example, AFAs working in an adviser firm need to be individually authorised by the FMA and produce an individual ABS. There is limited ability for an adviser firm (whether comprising three advisers or one hundred) to leverage economies of scale in its compliance activities," it said.
"QFEs are approved at the firm level with an upfront fee of $4,886, while AFAs are required to be individually authorised, with an upfront fee of $1145 per adviser. This means that a small-medium-sized advisory firm with ten advisers is currently required to spend almost $11,500 in direct fees compared to large QFE firms with potentially hundreds of advisers. The scale of this disparity means that AFAs are imposed with disproportionate direct compliance costs."
Commerce Minister Paul Goldsmith told Good Returns that the load should be made lighter for people who were already authorised. "For some of the current AFAs, it will definitely reduce the cost of compliance."
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Comments from our readers
I have just discovered the RIS (Regulatory Impact statement) on proposed changes to FAA.
In the section on firm vs individual licensing, a high benefit for existing AFAs from firm licensing is that the direct cost of licensing will be reduced. The example is a firm of 125 AFAs who will get a big reduction. Fine. But do you know how many firms have 125 or more AFAs. One. 3 others have between 100 and 125. No points for guessing these are 2 banks and 2 retail sharebroking firms. Hardly typical adviser firms from which to draw a general conclusion.
A second eyebrow raising part of the same analysis is that there will be only 515 firm licenses in the all-advisers caught regime, covering 31.100 individuals. That's about an average firm size of 60 advisers. Now I don't know the right numbers, but I reckon that across the investment advice, insurance broker, mortgage broker and fire and general broker universe, there are a large number of smaller firms. I would guess that that the average size is a lot lower than 60 and that therefore the number of financial advice firms to be licensed is several multiples (perhaps even 10 times) the 515 firms estimated.
But who else cares?
The four advice firms with over 100 AFAs are two retail sharebroking firms, one bank and one insurance company.
Three of them are QFEs.
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My headline would be from the perspective of a sole practice firm like mine (or a small practice with up to 4 advisers). Currently 1 pay for 1 AFA authorisation and 1 FSPR registration. When the new Act is in place, I will have to pay for 1 adviser firm license, and 1 FSPR registration for the FAF and another FSPR registration for myself if I go the FA route. Prima facie that is an increase for me and those other AFAs in the same business structure.
My hunch is that there by number a lot more 1-4 AFA firms than there are 5+ AFA firms. [Through the annual AFA return, FMA might be able to answer this question through the Tableau analysis tool they demonstrated at the last Adviser stakeholder meeting.]
And Phil, can I beg your indulgence to allow a little crowd-sourcing through Good Returns on a question all we smaller firms will need to consider.
Should a sole practitioner operating in company form become a financial adviser to their FAF, or should they take the intuitively less expensive route and be an A (for Agent) of their FAF.
In other words what are the pluses and minuses in a smaller practice of being a FA cf a simple A. Unless I have missed something in the announcements, I don't see many pluses. That's why I want to crowdsource.
In a sole or small practice, the adviser is the business - remember Lester Anderson's "You are the Product" lectures. Would the consumer think of us any differently if we were just an A vs being a FA?